If you’ve attempted to dive into this mysterious thing called blockchain, you’d be forgiven for recoiling in horror at the sheer opaqueness of the technical jargon that’s often used to frame it. So before we enter exactly what a crytpocurrency is and how blockchain technology might change the entire world, let’s discuss what blockchain actually is.
In the simplest terms, a blockchain is really a digital ledger of transactions, not unlike the ledgers we’ve been using for centuries to record sales and purchases. The big event of the digital ledger is, in fact, virtually identical to a traditional ledger in so it records debits and credits between people. That’s the core concept behind blockchain; the difference is who holds the ledger and who verifies the transactions.
With traditional transactions, a payment from anyone to some other involves some sort of intermediary to facilitate the transaction. Let’s say Rob really wants to transfer £20 to Melanie. They can either give her profit the shape of a £20 note, or he is able to use some sort of banking app to transfer the money right to her bank account. In both cases, a bank is the intermediary verifying the transaction: Rob’s funds are verified when he takes the money out of a cash machine, or they’re verified by the app when he makes the digital transfer. The bank decides if the transaction is going ahead. The bank also holds the record of all transactions created by Rob, and is solely responsible for updating it whenever Rob pays someone or receives money into his account. Quite simply, the financial institution holds and controls the ledger, and everything flows through the bank.
That’s plenty of responsibility, so it’s important that Rob feels he is able to trust his bank otherwise he wouldn’t risk his money with them. He must feel certain that the financial institution will not defraud him, will not lose his money, will not be robbed, and will not disappear overnight. This requirement for trust has underpinned almost any major behaviour and facet of the monolithic finance industry, to the extent that even when it was discovered that banks were being irresponsible with our money during the financial crisis of 2008, the government (another intermediary) chose to bail them out rather than risk destroying the last fragments of trust by letting them collapse.
Blockchains operate differently in a single key respect: they’re entirely decentralised. There is no central clearing house like a bank, and there is no central ledger held by one entity. Instead, the ledger is distributed across a vast network of computers, called nodes, each of which holds a copy of the entire ledger on their respective hard drives. These nodes are connected together with a software application called a peer-to-peer (P2P) client, which synchronises data over the network of nodes and makes sure everybody has the exact same version of the ledger at any given point in time.
Whenever a new transaction is entered right into a blockchain, it’s first encrypted using state-of-the-art cryptographic technology. Once encrypted, the transaction is transformed into something called a block, that is basically the word employed for an encrypted group of new transactions. That block is then sent (or broadcast) to the network of computer nodes, where it’s verified by the nodes and, once verified, offered through the network so the block may be put into the conclusion of the ledger on everybody’s computer, beneath the list of all previous blocks. This is called the chain, hence the tech is referred to as a blockchain.
Once approved and recorded to the ledger, the transaction may be completed. This is one way cryptocurrencies like Bitcoin work.
Accountability and removing trust
What are the features of this system over a banking or central clearing system? Why would Rob use Bitcoin in place of normal currency?
The clear answer is trust. As discussed earlier, with the banking system it is critical that Rob trusts his bank to protect his money and handle it properly. To make sure this happens, enormous regulatory systems exist to verify those things of the banks and ensure they’re fit for purpose. Governments then regulate the regulators, creating a kind of tiered system of checks whose sole purpose is to greatly help prevent mistakes and bad behaviour. Quite simply, organisations such as the Financial Services Authority exist precisely because banks can’t be trusted on their own. And banks frequently make mistakes and misbehave, as we’ve seen too many times. When you yourself have just one source of authority, power tends to get abused or misused. The trust relationship between people and banks is awkward and precarious: we don’t really trust them but we don’t feel there is much alternative.
Blockchain systems, on one other hand, don’t need one to trust them at all. All transactions (or blocks) in a blockchain are verified by the nodes in the network before being put into the ledger, which means there is not one point of failure and not one approval channel. If your hacker wanted to successfully tamper with the ledger on a blockchain, they would have to simultaneously hack an incredible number of computers, that is almost impossible. A hacker would also be virtually unable to create a blockchain network down, as, again, they would have to have the ability to turn off each computer in a network of computers distributed across the world.
The encryption process itself can also be an integral factor. Blockchains such as the Bitcoin one use deliberately difficult processes for their verification procedure. In the case of Bitcoin, blocks are verified by nodes performing a deliberately processor- and time-intensive group of calculations, often in the shape of puzzles or complex mathematical problems, which mean that verification is neither instant nor accessible. Nodes that commit the resource to verification of blocks are rewarded with a transaction fee and a bounty of newly-minted Bitcoins. This has the function of both incentivising individuals to become nodes (because processing blocks like this calls for pretty powerful computers and plenty of electricity), whilst also handling the procedure of generating – or minting – units of the currency. This is referred to as mining, since it involves a large amount of effort (by a pc, in this case) to generate a new commodity. It also means that transactions are verified by the absolute most independent way possible, more independent than a government-regulated organisation such as the FSA.
This decentralised, democratic and highly secure nature of blockchains means that they may function without the need for regulation (they are self-regulating), government and other opaque intermediary. They work because people don’t trust each other, rather than in spite of.
Let the significance of this sink in for a while and the excitement around blockchain starts to produce sense.
Where things get really interesting is the applications of blockchain beyond cryptocurrencies like Bitcoin. Considering that one of the underlying principles of the blockchain system is the secure, independent carbon credit blockchain verification of a transaction, it’s easy to imagine alternative methods where this type of process may be valuable. Unsurprisingly, many such applications are actually in use or development. Some of the best ones are:
Smart contracts (Ethereum): the most exciting blockchain development after Bitcoin, smart contracts are blocks that contain code that must definitely be executed in order for the contract to be fulfilled. The code may be anything, as long as a pc can execute it, however in simple terms it indicates that you should use blockchain technology (with its independent verification, trustless architecture and security) to produce a type of escrow system for any kind of transaction. For instance, if you’re a web designer you may create a contract that verifies if your new client’s website is launched or not, and then automatically release the funds for your requirements once it is. Forget about chasing or invoicing. Smart contracts may also be getting used to prove ownership of a property such as for example property or art. The potential for reducing fraud with this process is enormous.
Cloud storage (Storj): cloud computing has revolutionised the net and caused the advent of Big Data which includes, consequently, kick started the brand new AI revolution. But most cloud-based systems are run on servers stored in single-location server farms, owned by way of a single entity (Amazon, Rackspace, Google etc). This presents all the same problems while the banking system, because you data is controlled by way of a single, opaque organisation which represents just one point of failure. Distributing data on a blockchain removes the trust issue entirely and also promises to increase reliability because it is indeed much harder to take a blockchain network down.
Digital identification (ShoCard): two of the largest issues of our time are identify theft and data protection. With vast centralised services such as for example Facebook holding so much data about us, and efforts by various developed-world governments to store digital details about their citizens in a central database, the potential for abuse of our personal information is terrifying. Blockchain technology supplies a potential solution to the by wrapping your key data up into an encrypted block which can be verified by the blockchain network once you need certainly to prove your identity. The applications of the add the obvious replacement of passports and I.D. cards to other areas such as for example replacing passwords. Maybe it’s huge.
Digital voting: highly topical in the wake of the investigation into Russia’s influence on the recent U.S. election, digital voting has for ages been suspected to be both unreliable and highly vulnerable to tampering. Blockchain technology supplies a means of verifying a voter’s vote was successfully sent while retaining their anonymity. It promises not merely to reduce fraud in elections but additionally to increase general voter turnout as people will be able to vote on their mobile phones.